Taxation (International and Other Provisions) Act 2010 section 187A

Excess interest treated as a distribution

Section 187A deals with how excess interest paid between connected parties is reclassified as a distribution (dividend) when the recipient cannot make a compensating adjustment claim because they are within the charge to income tax rather than corporation tax.

• Where interest paid between connected parties exceeds the arm's length amount, the excess may be reclassified as a distribution
• This reclassification applies specifically where the recipient is unable to claim a compensating adjustment because they are subject to income tax rather than corporation tax
• The excess interest is treated for income tax purposes as a dividend paid by the company that paid the interest
• As a consequence of being treated as a dividend, the excess amount is also treated as a distribution, changing its tax character entirely